A European borrower borrows $565,000 from an American bank for one year. The interest rate is 4%. The exchange rate at the start of the year is $1.285/€ and is $1.251/€ at the end of the year.
1- What is the European borrower’s EUR-denominated equivalent cost of borrowing? (This is similar to computing a $-denominated equivalent cost of borrowing for a U.S. firm)
2- Assume today’s settlement price on a Chicago Mercantile Exchange EUR (euro) futures contract is $.1195/MXN. You BUY a futures contract to hedge an exposure to MXN5,000,000 payable. Your initial margin account balance is $25,000. The next three days’ settlement prices are $.1158/MXN, $.1176/MXN, and $.1145/MXN. Calculate the changes in the margin account (and the new balances) from daily marking-to-market adjustments over the next three days. The contract size is 5,000,000 Mexican Pesos.
ANS:DAY 0MB = $25,000
DAY 1? = _________MB = $__________
DAY 2? = _________MB = $__________
DAY 3? = _________MB = $__________